Can Fundamentals Explain Cross-Country Correlations of Asset Returns

CEPR Discussion Paper Series No. 1996

Posted: 28 Jan 1999

See all articles by Fernando Restoy

Fernando Restoy

Banco de España

Rosa Rodríguez

Universidad Europea de Madrid - Departamento de Matematica

Date Written: November 1998

Abstract

In the last few years, the empirical literature has documented that existing correlations between national returns are higher than correlations between the national growth rates of fundamental variables. In this paper we study the ability of intertemporal asset pricing models to explain cross-country correlations of national returns. When capital markets are assumed to be perfectly integrated, an intertemporal general equilibrium model is able to explain the obtained covariability of domestic asset returns but at the expense of generating too little variability in those returns. Results improve considerably if a partial, rather than a general equilibrium version of the fully integrated capital market model is employed and the analysis is continued to the last two decades in which capital flows are more liberalized. Then, both domestic variability and cross-country covariability of returns can be explained by using single international discount-factor of domestic aggregate dividends.

JEL Classification: E44, G12, G15

Suggested Citation

Restoy, Fernando and Rodríguez López, Rosa, Can Fundamentals Explain Cross-Country Correlations of Asset Returns (November 1998). CEPR Discussion Paper Series No. 1996, Available at SSRN: https://ssrn.com/abstract=141554

Fernando Restoy (Contact Author)

Banco de España ( email )

Madrid 28014
Spain
(34 91) 338 5119 (Phone)
(34 91) 338 5678 (Fax)

Rosa Rodríguez López

Universidad Europea de Madrid - Departamento de Matematica ( email )

Edificio C. Villaviciosa de Odon
Madrid, 28670
Spain
(+34)- 91-6647800 (Phone)

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